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21 December 2007
Article 16 of the EU Regulation on Insolvency Proceedings,(1) under which a court must recognize a main insolvency proceeding pending in the court of another member state where the debtor has its centre of main interests (COMI), constitutes a well-known tool that practitioners can use to centralize proceedings when an insolvent business operates in at least two member states. When a group of companies facing financial difficulties operates in one member state only, can the various stakeholders use the COMI concept, or some other rule, on a national level to centralize proceedings? This question is significant for two reasons.
Parties to proceedings are often concerned that, under the insolvency rules of many European countries, particularly those of France, the insolvent company and its subsidiaries may find themselves under the jurisdiction of separate bankruptcy courts across the country where their respective registered offices are located. As a result, each court may not have a full picture of the economic and financial issues facing the entire group, a view often crucial to a satisfactory resolution.
Furthermore, there is concern over the composition of the French commercial courts sitting as bankruptcy courts. In France, the local business communities, both large and small, elect judges from among their members, which may result in a great diversity between jurisdictions in terms of understanding and legal training. This contrast between large and small jurisdictions is also perceived, rightly or wrongly, with respect to court-appointed administrators and liquidators, who are often seen as too ill-equipped and understaffed to handle important cases, except for some located in the largest urban centres.
Recent discussion following a January 2007 decision by the Versailles Court of Appeal(2) has shed some light on the use of the COMI concept in insolvency proceedings by groups of companies established solely in France; it has demonstrated that there are means available to centralize proceedings and thus address the concerns discussed.
In this case, the parent company had its registered office in Colombes (a city within the jurisdiction of the Nanterre Commercial Court, near Paris) and the subsidiary had its registered office near Toulouse. The subsidiary filed for bankruptcy with the Nanterre Commercial Court, which accepted jurisdiction based on a finding that all of the management duties for the subsidiary were exercised in the premises of the parent company in Colombes, which had also filed for bankruptcy with that court.
On appeal, the jurisdiction of the Nanterre Commercial Court over the Toulouse subsidiary was challenged based on Article L662(2) of the Commercial Code, which grants jurisdiction to the court where the registered office of the debtor is located (ie, the Toulouse Commercial Court in this case). However, the Versailles Court of Appeal decided that the Nanterre Commercial Court had correctly applied the EU regulation instead of Article L662(2) of the code, based on the priority of EU rules over national rules, and that the Nanterre Commercial Court had jurisdiction under the COMI concept.
This decision has been criticized by legal commentators,(3) who point out that the regulation governs jurisdictional conflicts between bankruptcy courts of different member states and does not determine jurisdiction between two courts of the same state.
Furthermore, a more orthodox solution existed under French law pursuant to which the Nanterre Commercial Court might have been granted jurisdiction. Under Articles L662(2) and R662(7) of the code, the chief judge of the commercial court, as well as the public prosecutor, when ruling on a request to open the insolvency proceedings, may decide, when "the interests before the court justify the referral", to refer the case to the court of appeal to decide whether to remove the case to another bankruptcy court within its own district, or to refer the case to the Supreme Court to decide whether to remove the case to a bankruptcy court in another district.
Therefore, the chief judge of the Toulouse Commercial Court, as well as the public prosecutor, could have decided whether to remove the case to the Nanterre Commercial Court. The entire process would have taken no longer than two weeks.
Although the debtor's management could not have officially solicited the Toulouse Commercial Court to have the case relocated to the Nanterre Commercial Court, nothing would have prevented it or third parties, such as lenders, from suggesting to the chief judge of the Toulouse Commercial Court to initiate the process under Articles L662(2) and R662(7).
Debtors and lenders are not deprived of means to centralize insolvency proceedings involving a group of companies established solely in France, if doing so is in their best interest, without resorting to the regulation. However, why should the COMI concept not be applied to groups of companies established solely in France, since the underlying rationale of the COMI concept could be as relevant in the national context as on a European level? Even if the avoidance of complexity caused by the application of conflicting national insolvency rules would not be the ultimate purpose of the COMI concept when dealing with single-jurisdiction matters, cost effectiveness, consistency and procedural efficiency could constitute a justification for using internal COMI determination rules similar to those in the regulation.
For further information on this topic please contact Constantin Achillas at Denton Wilde Sapte by telephone (+33 1 53 05 16 00) or by fax (+33 1 53 05 97 27) or by email (firstname.lastname@example.org).
(2) Versailles Court of Appeal, January 11 2007, 13th chamber, Regulation 06/01087, Public Prosecutor v Gay, in his Capacity as Administrator to the Reorganization and SARL Dynamic Spray Packaging v SA Augros Cosmetic Packaging.
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